Question

Year 1 Year 2 Amounts billed to clients for services rendered $ 182,000 $ 232,000 Cash collected from clients 154,000 184,000 Cash disbursements Salaries paid to employees for services rendered during the year 84,000 94,000 Utilities 27,000 34,000 Purchase of insurance policy 58,200 0 In addition, you learn that the company incurred utility costs of $32,000 in year 1, that there were no liabilities at the end of year 2, no anticipated bad debts on receivables, and that the insurance policy covers a three-year period. Required: 1. & 3. Calculate the net operating cash flow for years 1 and 2 and determine the amount of receivables from clients that the company would show in its year 1 and year 2 balance sheets prepared according to the accrual accounting model. 2. Prepare an income statement for each year according to the accrual accounting model.

Answer 1

Treatment of insurance expense paid : in income statement the amount accrued to that year shall only be charged but not paid as in the given sum the insurance covers 3 years

net operating cash flow for year 1 and 2

Particulars	year 1	year2
Collections from clients	154000	184000
LESS
salaries paid	27000	34000
Utilities paid	84000	94000
Insurance paid	58200
NET CASH FLOW	(15200)	56000

() indicates negative balance

Workings before income statement

Calculation of accured utilities expense

Year1 paid =27000 accrued =32000

So still 5000 has to be paid which is paid in year 2

Year 2 paid34000 so accrued is 29000

Working 2

Insurance accrued for each year is 58200/3=19400

income statement for year 1 and 2

Particulars	year1	year2
Revenue
Income from services	182000	232000
Expense
Salary	84000	94000
Utilities	32000	29000
Insurance	19400	19400
Net income	46600	89600